The Rate Markup
A lender approves you at one interest rate, but the dealer quotes you a higher APR (Annual Percentage Rate—the cost of borrowing money, shown as a percentage). That markup can cost you thousands over the life of the loan.
How It Works
The Simple Version
When you finance through a dealer (called 'indirect financing'), the bank approves you at a certain interest rate—but the dealer presents you a higher rate and keeps the difference as profit. For example, if the bank approves you at 5% but the dealer tells you 7%, they pocket that 2% spread. Your best defense is getting pre-approved at a bank or credit union first, so you have a rate to compare against.
Quick Decision
Quick Math
Each 1% rate increase on a $30,000 / 60-month loan costs you:
Worth fighting for.
How to Protect Yourself
Get Pre-Approved First
Visit your bank or credit union before the dealership. A pre-approval (a written loan offer with your rate) is your proof of what rate you actually qualify for. Dealers can't lie about your creditworthiness when you have documentation.
Ask for the "Buy Rate"
The "buy rate" is the actual rate the bank approved you for—before the dealer adds their markup. You can directly ask: "What is the buy rate from the bank before any dealer participation?" They may not answer, but asking signals that you know how this works.
Credit Union Advantage
Credit unions (member-owned non-profit financial institutions) often have competitive auto loan rates and make it easy to get a pre-approval. Even if you end up financing at the dealership, walking in with a pre-approval gives you leverage and a benchmark to compare against.
Start with your existing bank/credit union and local credit unions. Eligibility and rates vary—compare offers in writing.
Sources & Further Reading
Notes: Sources are provided for general education. Rules can vary by state and change over time.